50 Multiple Choice Questions on Accounts

Questions 1 and 2 are based on the following information:
Lake Company recently incurred the following costs:
(1) Purchase price of land and dilapidated building $250,000
(2) Real estate broker's commission 14,000
(3) Net demolition costs of dilapidated building 39,000
(4) Excavation costs for new building 44,000
(5) Architect's fees and building permits 30,000
(6) Costs associated with new building construction 750,000
(7) Costs associated with new furniture and equipment 250,000
(8) Actual interest costs during building construction 168,000
(9) Actual interest cost after completion of building construction 120,000
(10) Costs of walks, driveways, and parking lot 55,000

____ 1. The building should be recorded on Lake's books at
a. $680,000.
b. $724,000.
c. $763,000.
d. $892,000.

____ 2. Land should be recorded on Lake's books at
a. $250,000.
b. $264,000.
c. $303,000.
d. $333,000.

____ 3. Colaw Supply bought equipment at a cost of $72,000 on January 2, 2000. It originally had an estimated life of ten years and a salvage value of $12,000. Colaw uses the straight-line depreciation method. On December 31, 2003, Colaw decided the useful life likely would end on December 31, 2007, with a salvage value of $6,000. The depreciation expense recorded on December 31, 2003, should be
a. $6,000.
b. $6,600.
c. $9,600.
d. $13,200.
___ 4. According to the FASB conceptual framework, in order to be relevant, accounting information must
a. be neutral.
b. be verifiable.
c. have predictive value.
d. be a faithful representation.

____ 5. Orlando Company exchanged old equipment for similar new equipment. The old equipment had a cost of $150,000, accumulated depreciation of $90,000, and a fair market value of $75,000. Orlando paid an additional $66,000 in cash. The new equipment should be recorded at
a. $135,000.
b. $150,000.
c. $126,000.
d. $141,000.

____ 6. If the entry to record the purchase of inventory is inadvertently omitted, but the item is correctly included in ending inventory, the effect when using the periodic inventory method is
Net Income Assets
a. Overstated No effect
b. Overstated Understated
c. Overstated Overstated
d. No effect No effect

____ 7. The cost of a patent should be
a. amortized over the assets' estimated useful life, or 20 years, whichever is shorter.
b. amortized over a period not exceeding 5 years.
c. amortized over the assets' estimated useful life.
d. charged to an expense account at acquisition.

____ 8. In a period of rising prices, the inventory method that results in the lowest income tax payment is
a. LIFO.
b. FIFO.
c. average cost.
d. specific identification.

____ 9. On November 30, Mann Company issued a $6,000, 10%, 4-month note to the National Bank. The entry on Mann's books to record the payment of the note at maturity will include a credit to Cash for
a. $6,000.
b. $6,600.
c. $6,200.
d. $6,150.

____ 13. If ending inventory is understated, net income and assets will be
Net Income Assets
a. Understated Understated
b. Overstated Overstated
c. Understated Unaffected
d. None of the above.

____ 14. One of the two "constraints" recognized by the FASB in applying the operating guidelines within its conceptual framework is
a. comparability.
b. materiality.
c. reliability.
d. relevance.

____ 15. The assumption that assumes a company will continue in operation long enough to carry out its existing objectives is the
a. economic entity assumption.
b. going concern assumption.
c. monetary unit assumption.
d. time period assumption.

____ 17. A daily cash count of register receipts made by a cashier department supervisor demonstrates an application of which of the following internal control principles?
a. Documentation procedures
b. Segregation of duties
c. Establishment of responsibility
d. Independent internal verification

____ 18. When the allowance method is used for bad debts, the entry to write off an individual account known to be uncollectible involves a
a. debit to an expense account.
b. credit to an expense account.
c. credit to the allowance account.
d. debit to the allowance account.

____ 19. Shipping terms of FOB destination mean that the
a. purchaser is responsible for the shipping charges.
b. shipping charges are debited to Freight-Out.
c. items should be in the purchaser's inventory account at year-end if the items are in transit.
d. both (a) and (c) above.

____ 21. The constraint of conservatism is best expressed as:
a. The cost of applying an accounting principle should not exceed its benefit.
b. Only material items should be recorded and reported.
c. When in doubt, choose the method that will least likely overstate assets and net income.
d. The lower of cost or market method should be used for inventories.

____ 22. A petty cash fund
a. results in expense accounts being charged when cash is disbursed.
b. should be replenished when the fund is low and at the end of the period.
c. results in expense accounts being charged when the fund is replenished.
d. both (b) and (c) above.

____ 23. If merchandise is sold for $4,000 subject to credit terms of 2/10, n/30, the entry to record collection in full within the discount period would include a
a. credit to Sales Discounts for $80.
b. credit to Accounts Receivable for $3,920.
c. credit to Accounts Receivable for $80.
d. none of the above.

____ 24. Harder Company's records show the following for the month of January:
Total Retained Earnings at January 1 $200,000
Total Retained Earnings at January 31 300,000
Total Revenues 335,000
Total Dividends Declared 15,000
Total expenses for January were
a. $320,000.
b. $335,000.
c. $235,000.
d. $220,000.

____ 27. The preparation of closing entries
a. is an optional step in the accounting cycle.
b. results in zero balances in all accounts at the end of the period so that they are ready for the following period's transactions.
c. is necessary before financial statements can be prepared.
d. results in transferring the balances in all nominal accounts to Retained Earnings.

____ 28. Allowance for Doubtful Accounts is reported in the
a. balance sheet as a contra asset.
b. balance sheet as a contra liability account.
c. income statement under other expenses and losses.
d. income statement under other revenues and gains.

____ 29. Current liabilities are obligations that are reasonably expected to be paid from
Existing Creation of Other
Current Assets Current Liabilities
a. No No
b. Yes Yes
c. Yes No
d. No Yes

____ 30. Which of the following errors will cause a trial balance to be out of balance? The entry to record a payment on account was
a. not posted at all.
b. posted as a debit to Cash and a credit to Accounts Payable.
c. posted as a debit to Cash and a debit to Accounts Payable.
d. posted as a debit to Accounts Receivable and a credit to Cash.

____ 33. Carey Company's equipment account increased $400,000 during the period; the related accumulated depreciation increased $30,000. New equipment was purchased at a cost of $700,000 and used equipment was sold at a loss of $20,000. Depreciation expense was $100,000. Proceeds from the sale of the used equipment were
a. $210,000.
b. $250,000.
c. $280,000.
d. $320,000.

____ 34. Which of the following would not be included in the operating activities section of a statement of cash flows?
a. Cash inflows from returns on loans (i.e., interest)
b. Cash inflows from returns on equity securities (i.e., dividends)
c. Cash outflows to governments for taxes
d. Cash outflows to reacquire treasury stock

____ 35. Which of the following combinations presents correct examples of liquidity, profitability, and solvency ratios, respectively?
Liquidity Profitability Solvency
a. Inventory turnover Inventory turnover Times interest earned
b. Current ratio Inventory turnover Debt to total assets
c. Receivables turnoverReturn on assets Times interest earned
d. Quick ratioPayout ratio Return on assets
____ 36. The concept of "significant influence" must be satisfied before which accounting method can be used by an investor?
a. Cost
b. Equity
c. Consolidated financial statements
d. All of the above

____ 38. Which of the following statements is true?
a. Trading securities are debt securities that the investor has the intent to hold to maturity.
b. Trading securities are securities bought and held primarily for sale in the near term.
c. Trading securities are securities that may be sold in the future.
d. Trading securities are reported at cost in the balance sheet.

____ 40. In accounting for available-for-sale securities, the Unrealized Loss - Equity account should be classified as a
a. liability on the balance sheet.
b. loss on the income statement.
c. deduction in the stockholders' equity section of the balance sheet.
d. contra asset on the balance sheet.

____ 41. Nott Corporation has the following stock outstanding:
6% Preferred, $100 Par $2,000,000
Common Stock, $50 Par 4,000,000
No dividends were paid the previous 2 years. If Nott declares $600,000 of dividends in the current year, how much will common stockholders receive if the preferred stock is cumulative?
a. $240,000
b. $360,000
c. $480,000
d. $160,000

____ 43. The directors of Caldwell Corp. are trying to decide whether they should issue par or no par stock. They are considering three alternatives for their new stock, which they are assuming will be issued at $8 per share. The alternatives are: (A) $5 par value, (B) no par with a $1 stated value, and (C) no par, no stated value. If 90,000 shares are issued, what amount will be credited to the common stock account in each of these cases?
(A) (B) (C)
a. $90,000 $450,000 $720,000
b. $90,000 $720,000 $720,000
c. $720,000 $720,000 $720,000
d. $450,000 $90,000 $720,000

____ 44. Rifkin Corp. reacquired 40,000 shares of its $2 par common stock at a cost of $13 per share on April 30, 2003. The stock was originally issued at $11 per share. On January 10, 2003, the 40,000 shares were sold at $16 per share. The sales entry should include a credit to Paid-in Capital from Treasury Stock for
a. $0.
b. $80,000.
c. $120,000.
d. $560,000.

____ 45. What is the effect on total paid-in capital of a stock dividend and a stock split, respectively?
Stock Dividend Stock Split
a. Increase No effect
b. No effect No effect
c. Decrease No effect
d. Decrease Decrease

____ 46. Which of the following should be classified as an extraordinary item?
a. Effects of major casualties not infrequent in the area
b. Write-off of a significant amount of receivables
c. Loss from the expropriation of facilities by a foreign government
d. Losses due to a bitter, lengthy labor strike

____ 47. Gannon Company changed from the straight-line method to the double-declining-balance method of depreciation during 2003 for equipment purchased for $500,000 on January 1, 2001. The equipment has an estimated 5-year life with no salvage. Gannon's tax rate is 40%. Gannon should report depreciation expense and a cumulative effect of change in accounting principle in 2003 of
Depreciation Expense Cumulative Effect
a. $72,000 $72,000
b. $48,000 $48,000
c. $43,200 $69,867
d. $72,000 $120,000

____ 48. A Discount on Bonds Payable account
a. is a contra account to Bonds Payable.
b. will cause interest expense to be less than cash interest payable.
c. is increased over the life of the bond until it equals the bond's face value.
d. is an adjunct account to Bonds Payable.

____ 49. In order to be considered extraordinary, an item must be
a. frequent and uninsured.
b. unusual and uninsured.
c. uninsured and infrequent.
d. infrequent and unusual.

____ 50. If the market rate of interest is lower than the stated rate, bonds will sell at an amount
a. equal to face value.
b. not determinable from the given information.
c. lower than face value.
d. higher than face value.

(9) Actual interest cost after completion of building construction 120,000

(10) Costs of walks, driveways, and parking lot 55,000

____ 1. The building should be recorded on Lake's books at

a. $680,000.

b. $724,000.

c. $763,000.

d. $892,000.

Answer: d. $892,000.

____ 2. Land should be recorded on Lake's books at

a. $250,000.

b. $264,000.

c. $303,000.

d. $333,000.

=250+14+39=303

Answer: c. $303,000.

____ 3. Colaw Supply bought equipment at a cost of $72,000 on January 2, 2000. It originally had an estimated life of ten years and a salvage value of $12,000. Colaw uses the straight-line depreciation method. On December 31, 2003, Colaw decided the useful life likely would end on December 31, 2007, with a salvage value of $6,000. The depreciation expense recorded on December 31, 2003, should be

a. $6,000.

b. $6,600.

c. $9,600.

d. $13,200.

Answer: c. $9,600.

72-3 x6 = 54 BV at the end of year 3

(54-6)/5=9.6

___ 4. According to the FASB conceptual framework, in order to be relevant, accounting information must

a. be neutral.

b. be verifiable.

c. have predictive value.

d. be a faithful representation.

Answer: c. have predictive value.

____ 5. Orlando Company exchanged old equipment for similar new equipment. The old equipment had a cost of $150,000, accumulated depreciation of $90,000, and a fair market value of $75,000. Orlando paid an additional $66,000 in cash. The new equipment should be recorded at

a. $135,000.

b. $150,000.

c. $126,000.

d. $141,000.

$75,000+ $66,000=$141,000

Answer: d. $141,000.

____ 6. If the entry to record the purchase of inventory is inadvertently omitted, but the item is correctly included in ending inventory, the effect when using the periodic inventory method is

Net Income Assets

a. Overstated No effect

b. Overstated Understated

c. Overstated Overstated

d. No effect No effect

Answer: a. Overstated No effect

____ 7. The cost of a patent should be

a. amortized over the assets' estimated useful life, or 20 years, whichever is shorter.

b. amortized over a period not exceeding 5 years.

c. amortized over the assets' estimated useful life.

d. charged to an expense account at acquisition.

Answer: a. amortized over the assets' estimated useful life, or 20 years, whichever is shorter.

____ 8. In a period of rising prices, the inventory method that results in the lowest income tax payment is

a. LIFO.

b. FIFO.

c. average cost.

d. specific identification.

Answer: a. LIFO.

____ 9. On November 30, Mann Company issued a $6,000, 10%, 4-month note to the National Bank. The entry on Mann's books to record the payment of the note at maturity will include a credit to Cash for

a. $6,000.

b. $6,600.

c. $6,200.

d. $6,150.

6000 x ( 1+ 10% * 4/12)= 6200

Answer: c. $6,200.

____ 10. The following information is available for Sanchez Company:

Beginning Inventory $ 60,000

Cost of Goods Sold 600,000

Ending Inventory 100,000

Net Sales 800,000

Inventory turnover for the year is

a. 10.0 times.

b. 8.0 times.

c. 7.5 times

d. 6.0 times.

Answer: c. 7.5 times

Average inventory= (60,000+100,000)/2= 80,000

Cost of goods sold=600,000

Inventory turnover= 600,000/80,000= 7.5

____ 11. The inventory methods that result in the most current costs in the income statement and balance sheet are